Lack of Sound Banking Practices

Item added by abichara. Added on 10/06/2009
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6 Reviews


Lack of Sound Banking Practices 5

...and the gradual legalization of said practices.

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Lack of Sound Banking Practices 5

The financial sector needs solid regulation - without this you have nothing more than Vegas without the hookers and neon. . . and both of these empires were built by the losers instead of the winners.

And both American political parties bear some responsibility for this.

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Lack of Sound Banking Practices 4

I'm glad that the banks have changed some of their practices as a lot of their policies were just too flawed. One of them being Career Development Loans. Before where the Student Loans Company would lend students money and they would give the money back once earning a certain amount of money a year or proving they were not earning in this particular bracket banks simply don't care. They would lend out money to students not really thinking of the implications. The apr alone on some of these loans were extoritionate and more than a mortgage. How can a student pay back a minimum of £180-£200-a-month ($289-$320) over a course ranging from 3-5 years only two months after graduating. That's clearly nuts!!!

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Lack of Sound Banking Practices 5

This factor is easily one of the top intermediate causes of the financial collapse. Many of the other items on this list are contributors to the collapse, but at its very core, the problem we have is related to the soundness of the banking system.

First, some basics. Many people claim that banks create money out of thin air. This is not true. Banks merely recycle money, that is, they increase the velocity of a certain amount of money in circulation. It is important to distinguish between the regular ordinary banks that you and I bank in, versus Central Bank's like the Federal Reserve, which CAN print money out of thin air (unfortunately for us). The concept of fractional reserve lending is fine, the problem is when the banks decide to overleverage themselves in unsecured lending, may it be for credit cards, car or home mortgages, or construction lending. Then you have complex securities and derivatives like credit default swaps that are other forms of unsecured loans, although it is far more complex.

Unsecured loans are loans that have no collateral backing it up, just the promise that the debtor will pay back the bank. Values are usually speculative in nature, not backed up by any tangible asset. Since there is nothing to back up the loan but a signature and a promise, the potential for default goes up. And if it does, the bank will likely have to take a big cut in the value of the loan in the open market just to sell it. And that is why the banks are suffering huge losses. Their clients are defaulting and they have to write down the value of their loans out of capital. This at its base is the real cause of the economic crisis, which contrary to domestic news reports, continues to unwind as we speak.

These dynamics are simply unacceptable, especially considering that history records that these same types of loose lending practices ended up causing two major depressions in American history, in 1873 and in 1929/1930. Defaults beget more defaults, and through the capital markets the contagion eventually spread throughout the entire financial system. The present mess was caused by banks deviating from key sound banking principles, the most prominent of which is the notion that one must never lend out more unsecured than one has in excess capital.

Banks that do so are technically insolvent, as they have nothing backing up the value of their assets, namely their loans.

This MUST be the key lesson that we take from this crisis. Yet it appears as if the banks, regulators and other stakeholders have been somewhat slow on this uptake with this. The problem is that the banks extended credit without collateral beyond the actual cash reserves of the bank in question.

As for the Central Banks like the Fed, they also engage in plenty of unsound banking practices; I have already touched on in some of my prior reviews and will detail further in later ones.

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Lack of Sound Banking Practices 3

More like lack of sound banking regulation. How Barney Frank (D) and Chris Dodd (D) and the like keep getting elected is beyond me!

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Lack of Sound Banking Practices 5

After the crash of '29, the practices of banks and other financial institutions were regulated.

Assuming one doesn't mind the fact that a fairly large segment of the population was left out of the ensuing era of prosperity, these new rules and regulations kept those tempted to manipulate the economy for nefarious purposes more or less on the straight and narrow through the '70s.

Then - mainly due to the short attention span of modern Americans - we got de-regulation, and soon enough came the inevitable 21st century crash.

To those who will point out the fact that I haven't addressed the "global", I'll just point out the fact that - until recently - the world revolved around the USA.

It will be interesting to see what transpires now that China and the Arabs are in the driver's seat.

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Votes on this review: 3 Helpful / 0 Funny / 3 Agree / 1 Disagree

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